South Korean banks are creating custody companies to deal with cryptocurrencies — without having to touch the asset itself

• South Korea's new legislation states that domestic entities cannot directly access the services of cryptocurrency exchanges.
• So big banks in the country are partnering with fintech companies to allow their customers access to the crypto market in the form of digital asset custody services (DACS).
• DACS provide customers with options like trade settlement, exchange, clearing, and corporate action execution — and they are perceived to be safer than crypto exchanges.

With less than two months to go until South Korea’s new crypto regulations come into law, the biggest banks in the country are announcing new ways to keep the door to cryptocurrencies open for their customers.

On Sunday, Woori Financial Group — one of South Korea's largest banking companies — announced its foray into the digital asset custody services (DACS) market. It's partnering with Bitcoin-based fintech solution company, Coinplug to establish a digital asset custody joint venture named D-Custody.

By providing DACS, a bank can continue to provide its customers with access to crypto-based companies like exchanges. Just as India has CDSL and NSDL for DEMAT-based custodian services, South Korea is also following a similar format for dealing in cryptocurrencies.

Previously, the exchanges offered independent wallet-like services to store a users’ holding record. With custodians in the picture, the asset holding is institutionally legitimised and regulators can monitor transactions for any red flags.

Woori is only the latest South Korea bank to find a way out to keep cryptocurrencies accessible

Woori is the fourth significant bank to enter the crypto space, after Kookmin Bank, NH Nonghyup Bank, and Shinhan Financial Group.

Kookmin Bank calls its DACS company KODA and is backed by technology from blockchain developer Haechi Labs and in association with Hashed. While many more cryptocurrencies are planned, the custody solution currently supports three cryptocurrencies: Bitcoin, Ethereum, and KLAY, the token for the Kakao-led KLAYTN blockchain network.

Shinhan Bank, meanwhile, became a strategic investor in Korea Digital Asset Custody Company (KDAC) — another DACS firm created by Korbit, a digital asset exchange. Bithumb, the country’s second-largest crypto exchange, reached an agreement with NH Bank, better known as Nonghyup Bank. From September 1, new users will be able to open accounts, enabling trade of various major cryptocurrencies and tokens with the Korean won

How South Korea is legitimising cryptocurrency

Under the new legislation, all virtual asset management providers, including cryptocurrency exchanges and other virtual asset service providers, must register with the Korea Financial Intelligence Unit (KFIU) to operate.

To register, businesses must be certified by the Information Security Management System (ISMS), ensuring customers have a real name bank account. In what may be viewed as a crackdown, authorities have also confirmed that they will move forward with a previously announced 20 percent capital gains tax on transactions in virtual assets from next year.

While four out of five banks have announced their plans to enter the blockchain space, critics are worried the harsh laws will discourage smaller companies and push out many players.

Companies have considered filing a lawsuit against the government and the financial regulator, alleging the new law is unconstitutional. Banks continue to be concerned about their exposure to fraudulent transactions, which shall be their responsibility by law. However, a few are open to trying out new blockchain-based solutions as they gradually feel their way through uncharted territory.

Currently, only four exchanges — Bithumb, Upbit, Coinone and Korbit — have established partnerships with conventional banks. They are now often called the 'Big 4', which is a widely famous nickname for its association with monopolisation.

According to the country's law enforcement agencies, cryptocurrency-related crimes have resulted in losses of $4.9 billion since 2017. Even North Korea has been leveraging the global currency to bypass international sanctions. Recently, a North Korean hacker crew called Lazarus Group has been indicted of carrying out a heist on cryptocurrency exchange KuCoin, often dubbed the biggest cryptocurrency theft of 2020 at $275 million worth of virtual money.

The lawmakers are confident that close monitoring by the watchdog can help prevent abuse of the system. With an equivalent ethos, The Bank of Korea is also planning to initiate a pilot project to develop central bank digital currency (CBDC), which could lessen the appeal of virtual assets.

For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

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